By understanding opportunity cost, we can harness the power of our limited resources today, in order to propel us to massive success tomorrow.
We live in a world surrounded by hype and fake success. With everyone and their dog (literally) modeling on social media, it’s easy to get caught up in the show.
But things haven’t really changed. It used to be called “keeping up with the Joneses” — where there was always someone to envy on your block. Envy their clothes, look, boat, car, house, etc. If you wanted to be envious, it was next door. And this envy drove people to needlessly consume for show.
It’s now the same old shit, just a bigger neighborhood. It’s become “Keeping Up With the Kardashians,” and we have a full network of envy right at our fingertips — Instagram, Facebook, Twitter, wherever.
That’s fine and dandy for the regular folks (not really), but, if you want to be a successful entrepreneur, this trap can easily bleed you of your two most valuable resources — time and money.
And before you know it, you’re out buckets of blood and look like a retired Frank Reynolds.
The reality is, you can only do one thing with your time/money. In the financial world it’s called opportunity cost — and it not only helps put a value on lost resources, but lost opportunity as well.
Opportunity Cost — The Long-Term Value of Resources
Briefly, opportunity cost is a financial term that is used to describe what we lose when we make a decision with our money/time.
For instance, if I decide to buy a $100 shirt. I not only lose out on that $100, but I am also losing out on every possible alternative that I could have spent that $100 on.
The same goes with time. If I spend 1.5 hours during lunch watching a Netflix documentary on the Fyre Festival, then I lose out on all of the other possible alternatives that I could have spent that time on (I stand behind my decision lol).
For the Entrepreneur — This is Extremely Valuable
Often, so many of those starting their own businesses think that the way they dress, the car they drive, or the restaurants they frequent are key to their success.
But every time we spend our money on anything other than “at bats,” we throw away that opportunity forever.
This “at bat” simply means a business lead — an opportunity for a new client, sale, etc. Like in baseball, an “at bat” is an opportunity for a hit — which can result in an out, a base run, or even a home run.
For instance, let’s say you are a website designer. If you could go on Google Adwords and get someone to call your business for $100, that would mean an “at bat,” or a potential opportunity, costs you $100.
If you spend $100 on a shirt. You just threw away a potential “at bat.”
If you buy a $200 pair of shoes, that’s two possible leads.
If you have a $400 car payment, that’s four leads a month.
But where opportunity cost gets really interesting is when we start including the future value of our investment. So, if we invest our money into a lead, and that lead ends up spending $2,500 on our services, then the opportunity cost of that shirt was $2,600 ($100 plus the potential $2,500). Mind-bottling.
And there are plenty of examples we could get into about the opportunity cost of time as well, but I think the monetary examples explain it well enough.
This is opportunity cost. It’s vitally important to everyone, but especially to entrepreneurs and those starting a business. Why? Because potential clients could have an opportunity cost of thousands, or even millions, of dollars.
Now that we understand how much opportunity cost comes with spending money on lifestyle, we have a better idea why this “Keeping Up With the Kardashians” mentality can be devastating over the long-term.
Relaxation is Important— How I Spent My Weekends
When I was younger I liked girls, I liked having a drink or two, and I enjoyed being social and relaxing. Most of us do.
We all need a break, but I wasn’t going to waste my money on stupid shit that wasn’t going to get me anything of real value. I was determined, however, to have a good time.
So, I’d jump on my longboard and ride downtown. Hit up the gas station on the way and grab a shitty malt liquor. Slug that. Then hit up the many clubs with no cover charge to get in. Go in, hang out, talk to whoever, whatever, wherever the night would take me, and then head back home on my longboard.
All in all it cost me about $2.50 a night and I always had a blast.
Now I am not saying you have to live like me. But there are cheap ways to enjoy yourself while building your business. If you are throwing away your time because you need to relax, don’t throw away your money as well. Debauchery can be a major expense.
Add to this the fact that I was probably wearing…
$10 Shoes. $15 Shirt. $20 Jeans. $15 Watch.
Enjoying my free time was important, but not worth risking my potential business opportunity. (There is a great book on this topic called “Your Money or Your Life” if you want to read more on the subject. One of my all time favorites.)
Opportunity cost is powerful, and that’s why, when we spend exorbitant amounts of time and money on our lifestyle over our business, we lose out on massive potential for future success.
Bill Gates Vs. Bernie Madoff
For those looking for shortcuts, eventually, the house of cards will fall. You can only run a scam for so long.
In two extreme examples of this, we can look at Bill Gates compared to Bernie Madoff.
We (mostly) all know the story of Bernie Madoff. Madoff was a successful investor, at first. However, as he began losing money, he decided that keeping up with appearances was too important — which led to billions in fraud.
Eventually it came back to haunt him hard. He had a few years where he fooled everyone, but, eventually, it led to misery, disease, and suicide within his own family — and a 150 year prison sentence for Madoff himself.
(And the Fyre Festival documentary I watched today, on Hulu, is another great example of an individual who prioritized looking successful over adding value.)
Compare that now to Bill Gates. What a treasure.
The guy still dresses like a normal guy with nothing to prove. There is no guile with Bill Gates. He has more important things to do than spend his time and money worrying if he will look good in Yeezys.
And, on another level, the guy really puts his heart and soul into helping the world with his Bill and Melinda Gates Foundation. Not only a great lesson for entrepreneurship, but a great lesson on self-actualization and being happy in life.
He gets it. He has taken the leap from understanding how powerful his time and money are in his own business, to applying that same mentality on a global scale.
A lesson on just how much power we all have to make positive change.
One of these guys is extremely successful, and one was a con-artist. But time weeds out all fakers. Those who play the long game and invest in themselves over their appearance will win monetarily and emotionally.
Look Actively for Ways to Save and Build Momentum
Just like in sports, momentum in business is key. All of us, especially those who are starting out, should be actively looking for ways to save money and invest in our business.
Every Starbucks trip, every fancy bottle of wine, every expensive shirt, restaurant trip, unnecessary Amazon purchase — any of these could be the difference between landing that key client and stagnation.
Budgeting sucks. But when it comes to running a business, sometimes we really need to dig in hard and focus on building.
And if budgeting money is hard, budgeting time can sometimes be even more grueling. But time is a key variable to success.
This doesn’t mean you can’t look nice. But unless you are in the fashion industry, there will rarely be a business owner you meet that will know or even care what brand you are wearing.
Successful business owners have more important things to worry about.
And, with the internet, much of the business being done is over the phone. So as crazy as this idea is, someone out there is making a killing from a shack in the middle of the woods with no clothes on.
Work for the long term. In my own business, there have been many times where I would take on a client and make zero off of that client for months until I had proven that I could help them succeed. That means, in essence, I am paying even more for that client. But that’s a sacrifice I am willing to make to have a long-term relationship.
Don’t fall for hype. Success is internal. It comes with putting your time and your money into building yourself and getting good in a business where you can help others succeed.
And if you can help others succeed, you cannot fail, you will have more money than you need (Rolling Stones), and you will have job security for the rest of your life.